University of Khartoum

School of Management Studies Diploma/Master of

Business Administration (D/MBA) Semester Four -Year
2022/2023
Chapter Five
Title: Security-Market Indexes

Reference: Frank K. Reilly &Keith C. Brown, Investment

Analysis & Portfolio Management, Tenth Edition , © 2012, 2009
South-western, Cengage Learning ALL RIGHTS RESERVED

1
 LEARNING OBJECTIVES

• After you read this chapter, you should be able to

answer the following questions:
▪ • What are some major uses of security-market indexes?
▪ • What major characteristics cause alternative indexes to
differ?
▪ • What are the major stock-market indexes in the United
States and globally, and what are their characteristics?

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 LEARNING OBJECTIVES

▪ • Why are bond indexes more difficult to create and maintain

than stock indexes?
▪ • What are the major bond-market indexes for the United States
and the world?
▪ • What are some of the composite stock-bond market indexes?
What is the relationship among many of these indexes during
short run periods (monthly)?

3
 INTRODUCTION

▪ Although portfolios are obviously composed of many

different individual stocks, investors typically ask, “What
happened to the market today?”
▪ The reason for this question is that if an investor owns more
than a few stocks or bonds,
▪ It is cumbersome to follow each stock or bond individually
to determine the composite performance of the portfolio.

4
 INTRODUCTION

▪ Also, there is an intuitive notion that most individual stocks or

bonds move with the aggregate market.
▪ To supply investors with a composite report on market
performance,
▪ Some financial publications or investment firms have created
and maintain:
▪ stock-market and bond-market indexes.
5
 INTRODUCTION

▪ The initial section of this chapter, discusses several ways that

investors use security-market indexes.
▪ The second section, considers what characteristics cause
various indexes to differ.
▪ The third section, presents the most well-known U.S. and
global stock-market indexes, separated into groups based on
the weighting scheme used.

6
 INTRODUCTION

▪ Section four, considers bond-market indexes that are becoming a

more important topic because the bond market continues to grow
in size and importance for individuals and institutions.
▪ The fifth section, considers composite stock market-bond market
series.
▪ The final section, examines how alternative indexes relate to each
other over monthly intervals.

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 5.1 USES OF SECURITY-MARKET
INDEXES

• Security-market indexes have at least five significant uses.

▪ An aggregate stock or bond-market index can be used as a
benchmark to judge the performance of professional money
managers.
▪ An obvious use of indexes is to develop an index portfolio.
▪ Another group interested are of “technicians,” who believe past
price changes can be used to predict future price movements.

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 5.1 USES OF SECURITY-MARKET
INDEXES

▪ Securities analysts, portfolio managers, and academicians doing

research use security market indexes to:
➢ examine the factors that influence aggregate security price
movements and
➢to compare the risk-adjusted performance of alternative asset
classes (e.g., stocks versus bonds versus real estate).
▪ An aggregate market index is used as a proxy for the market
portfolio of risky assets.
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 5.2 Differentiating Factors In
Constructing Market Indexes

• Because the indexes are intended to reflect the overall movements

of a group of securities,
▪ we need to consider three factors that are important when
constructing an index intended to represent a total population.
▪ The Sample
▪ Weighting Sample Members
▪ Computational Procedure
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 5.2 Differentiating Factors In
Constructing Market Indexes
• 5.2.1 The Sample
• The first factor is the sample used to construct an index.
• The size, the breadth, and the source of the sample are all
important.
➢Size: A small percentage of the total population will provide valid
indications of the behavior of the total population if the sample is
properly selected.
➢The sample should be representative of the total population;
otherwise, its size will be meaningless.
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 5.2 Differentiating Factors In
Constructing Market Indexes

• 5.2.1 The Sample

➢Breadth: The sample can be generated by completely random
selection or by a nonrandom selection technique designed to
incorporate the important characteristics of the desired population.
➢Finally, the source of the sample is important if there are any
differences between segments of the population, in which case
samples from each segment are required.

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 5.2 Differentiating Factors In
Constructing Market Indexes
• 5.2.2 Weighting Sample Members
• The second factor is the weight given to each member in the sample.
• Four principal weighting schemes are used for security-
market indexes:
• (1) a price-weighted index,
• (2) a market-value weighted index,
• (3) an unweighted index, or what would be described as an equal-
weighted index, and
• (4) a fundamental weighted index based on some operating variable
like sales, earnings, or return on equity.
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 5.2 Differentiating Factors In
Constructing Market Indexes
• 5.2.2 Weighting Sample Members
• (1) a price-weighted index,
• means that, index movements are influenced by the differential
prices of the components.
• (2) a market-value weighted index,
• is generated by deriving the initial total market value of all stocks
used in the index (Market Value = Number of Shares Outstanding
× Current Market Price).
•
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 5.2 Differentiating Factors In
Constructing Market Indexes
• 5.2.2 Weighting Sample Members
• (3) an unweighted index, or what would be described as an
equal-weighted index, and all stocks carry equal weight regardless
of their price or market value.
• (4) a fundamental weighted index based on some operating
variable like sales, earnings, or return on equity. employs some
widely used fundamental factors. Specifically, four broad
fundamental measures of size: sales, profits (cash flow), net assets
(book value), and distributions to shareholders (dividends).
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 5.2 Differentiating Factors In
Constructing Market Indexes
• 5.2.3 Computational Procedure
▪ The final consideration is the computational procedure used.
▪ One alternative is to take a simple arithmetic mean of the
various members in the index.
▪ Another is to compute an index and have all changes, whether in
price or value, reported in terms of the basic index.
▪ Finally, some prefer using a geometric mean of the components
rather than an arithmetic mean.
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 5.3 Stock-market Indexes

▪ This section, briefly reviews how the major series differ in

terms of the characteristics discussed in the prior section,
▪ It helps you understand why the percent changes over time
for alternative stock indexes should differ.
▪ The discussion of the indexes has organized by the weighting
of the sample of stocks.

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 5.3.1 Price-weighted Index

▪ A price-weighted index is an arithmetic mean of current stock

prices,
▪ Means that index movements are influenced by the differential
prices of the components.
▪ Dow Jones Industrial Average (DJIA)
▪ The best-known price-weighted index
▪ Also is the oldest and
▪ certainly, the most popular stock-market index.
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 5.3.1 Price-weighted Index

▪ The DJIA is a price-weighted average of 30 large, well known industrial

stocks that are generally the leaders in their industry (blue chips).
▪ It is computed by totaling the current prices of the 30 stocks and
dividing the sum by a divisor that has been adjusted to take account of
stock splits and changes in the sample over time.
▪ The divisor is adjusted so the index value will be the same before and
after the split.

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 5.3.1 Price-weighted Index

▪ An adjustment of the divisor is demonstrated in Exhibit 5.1.

▪ The equation for the index is:

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5.3.1 Price-weighted Index

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 5.3.1 Price-weighted Index

▪ In Exhibit 5.1, we employ three stocks to demonstrate the procedure

used to derive a new divisor for the DJIA when a stock splits.
▪ When stocks split, the divisor becomes smaller, as shown.
▪ The cumulative effect of splits can be derived from the fact that the
divisor was originally 30.0, but as of April 8, 2011 it was 0.132129493.
▪ The adjusted divisor ensures that the new value for the index is the
same as it would have been without the split.

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 5.3.1 Price-weighted Index

▪ In this case, the presplit index value was 20.

▪ Therefore, after the split, given the new sum of prices, the divisor is
adjusted downward to maintain this value of 20.
▪ The divisor is also changed when there is a change in the sample
makeup of the index.
▪ Because the index is price weighted, a high-priced stock carries more
weight than a low-priced stock.
▪ As shown in Exhibit 5.2,
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5.3.1 Price-weighted Index

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 5.3.1 Price-weighted Index

• A 10 percent change in a $100 stock ($10) will cause a larger change

in the index than a 10 percent change in a $30 stock ($3).
• For Case A, when the $100 stock increases by 10 percent, the average
rises by 5.5 percent;
• For Case B, when the $30 stock increases by 10 percent, the average
rises by only 1.7 percent.

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 Criticism of the DJIA

• The DJIA has been criticized on several counts:

▪ First, the sample used for the index is limited to 30 nonrandomly
selected large, mature blue-chip stocks.
➢As a result, the DJIA:
✓ has not been as volatile as other market indexes, and
✓ its long-run returns are not comparable to other NYSE stock
indexes.
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 Criticism of the DJIA

▪ In addition, because the DJIA is price weighted, when companies have a

stock split, their prices decline and therefore their weight in the DJIA is
reduced.
➢Therefore, the weighting scheme causes a downward bias in the DJIA
because:
✓High-growth stocks will have higher prices and
✓Such stocks tend to split,
✓these stocks of growing companies will consistently lose weight within the
index. 27
 5.3.1 Price-weighted Index

▪ Nikkei-Dow Jones Average

▪ Also referred to as the Nikkei Stock Average Index,
▪ It is an arithmetic mean of prices for 225 stocks on the First
Section of the Tokyo Stock Exchange (TSE),
▪ It shows stock price trends since the reopening of the TSE.
▪ Similar to the DJIA, it is a price-weighted index and
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 5.3.1 Price-weighted Index

▪ Is likewise criticized because the 225 stocks only comprise

about 15 percent of all stocks on the First Section.
▪ It is reported daily in The Wall Street Journal and the Financial
Times and weekly in Barron’s.

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 5.3.2 Value-weighted Index

▪ A value-weighted index is generated by deriving the initial total

market value of all stocks used in the index:
▪ (Market Value = Number of Shares Outstanding)× Current Market Price).
➢This initial figure is typically established as the base and assigned an index
value.
➢ Typically, the beginning index value is 100, but it can vary—say, 10, 50.

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 5.3.2 Value-weighted Index

➢Subsequently, a new market value is computed for all securities in the

index, and
➢ The current market value is compared to the initial “base” market value
to determine the percentage change, which
➢In turn is applied to the beginning index value.
➢Subsequently, a new market value is computed for all securities in the
index, and

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 5.3.2 Value-weighted Index

➢The current market value is compared to the initial “base” market value
to determine the percentage change, which
➢In turn is applied to the beginning index value.

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33
 5.3.2 Value-weighted Index

▪ A simple example for a three-stock index in Exhibit 5.3 indicates that:

▪ There is an automatic adjustment for stock splits and other capital
changes with a value-weighted index, Why ?
▪ Because the decrease in the stock price is off set by an increase in the
number of shares outstanding.
▪ In a value-weighted index, the importance of individual stocks in the
sample depends on the market value of the stocks.

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 5.3.2 Value-weighted Index

▪ Therefore, a specified percentage change in the value of a large company

has a greater impact than a comparable percentage change for a small
company.
▪ As shown in Exhibit 5.4, if we assume that the only change is a 20
percent increase in the value of stock A, which has a beginning value of
$10 million,
▪ The ending index value would be $202 million, or an index value of 101.
▪ In contrast, if only stock C increases by 20 percent from$100 million, the
ending value will be $220 million or an index value of 110.
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 5.3.2 Value-weighted Index

▪ The point is, price changes for large market value stocks in a value-
weighted index will dominate changes in the index value over time.
▪ Therefore, it is important to be a ware of the large-value stocks in the
index.

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37
 5.3.3 Unweighted Index

▪ In an unweighted index, all stocks carry equal weight regardless of them

price or market value.
▪ A $20 stock is as important as a $40 stock, and the total market value of
the company is unimportant.
▪ Such an index can be used by individuals who randomly select stock for
them portfolio or invest the same dollar amount in each stock.
▪ One way to visualize an unweighted index is to assume that equal
dollar amounts are invested in each stock in the portfolio.
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 5.3.3 Unweighted Index

▪ In fact, the actual movements in the index are typically based on the
arithmetic mean of the percent changes in price or value for the stocks
in the index.
▪ The use of percentage price changes means that the price level or the
market value of the stock does not make a difference—each
percentage change has equal weight.
▪ Exhibit 5.5 demonstrates the computation of an equal weighted index
using the average of the percent changes for each of the three stocks.
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40
 5.3.3 Unweighted Index

• There is also a comparison to the index value if market value

weights are used.
• As shown, the equal weighting result gives a higher value because of
the large percent increase in value for the stock with the smallest
market value.
• In contrast, the market value weighted index did not do as well
because the large-cap stock (that has a large weight) experienced
the poorest performance.
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 5.3.3 Unweighted Index

• In contrast to computing an arithmetic mean of percentage changes, both

Value Line and the Financial Times Ordinary Share Index compute a
geometric mean of the holding period returns and derive the holding
period yield from this calculation.
• Exhibit 5.6, which contains an example of an arithmetic and a geometric
mean, demonstrates the downward bias of the geometric calculation.
• Specifically, the geometric mean of holding period yields (HPY) shows
an average change of only 5.3 percent versus the actual change in wealth
of 6 percent.
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5.3.3 Unweighted Index

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 5.3.4 Fundamental Weighted Index

▪ As noted, one of the rationales for using market-value weighting is that

the market value of a firm is an obvious measure of its economic
importance.
▪ In contrast, some observers contend that this weighting scheme results
in overweighting overvalued stocks over time and under weighting
undervalued stocks.
▪ In response to this implicit problem with market-value weighting, some
observers have suggested other measures of a company’s economic
footprint.
44
 5.3.4 Fundamental Weighted Index

▪ The leading advocates of an approach that weights firms based on

company fundaments.
▪ Their approach to creating a Fundamental Index is an example of
employing some widely used fundamental factors.
▪ Specifically, they proposed four broad fundamental measures of
size:
➢(1) sales,
➢(2) profits (cash flow),
➢ (3) net assets (book value), and
➢ (4) distributions to shareholders (dividends). 45
 5.3.4 Fundamental Weighted Index

▪ Given these variables for a large sample of firms, they created an index of
1,000 of the largest firms and
▪ Computed the percent of each firm’s sales, cash flow, book value, and
dividends to the total for the sample and
▪ Determined a company’s relative size (weight) by averaging the weights
of the four-size metrics across the trailing five years (to avoid the impact
of cyclicality).
▪ The authors contend that this index [RAFI]) is representative, but also
ensures high liquidity, high capacity, and low turnover.
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 5.3.6 Global Equity Indexes

▪ While these local indexes are closely followed within each country, a
problem arises in comparing the results implied by these indexes for
different countries why ?
▪ Because of a lack of consistency among:
➢ the min sample selection,
➢weighting, or
➢computational procedure.
▪ To solve these comparability problems, several investment data firms have
computed a set of consistent country stock indexes.
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 5.3.6 Global Equity Indexes

▪ The three major sets of global equity indexes includes:

▪ FT/S&P-Actuaries World Indexes
▪ These indexes are jointly compiled by the Financial Times Limited, Gold man
Sachs & Company, and Standard & Poor’s (the “compilers”) in conjunction
with the Institute of Actuaries and the Faculty of Actuaries.
▪ Approximately 2,500 equity securities in 30 countries are measured,
▪ Covering at least 70 percent of the total value of all listed companies in each
country.
▪ All securities included must allow direct holdings of shares by foreign nationals.
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 5.3.6 Global Equity Indexes

▪ The three major sets of global equity indexes includes:

▪ FT/S&P-Actuaries World Indexes
▪ The indexes are market value weighted and
▪ have abase date of December 31, 1986 =100.
▪ The index results are typically reported in U.S. dollars, but, on occasion, have
been reported in U.K. pound sterling, Japanese yen, euros, and the local
currency of the country.
• In addition to the individual countries and the world index, there are several
geographic subgroups, subgroups by market value, and by industry sectors.
• These indexes are available daily in the Financial Times. 49
 5.3.6 Global Equity Indexes

▪ In addition to the individual countries and the world index, there are several
geographic subgroups, subgroups by market value, and by industry sectors.
▪ These indexes are available daily in the Financial Times.
▪ Morgan Stanley Capital International (MSCI) Indexes
▪ These International Indexes are consisting of three international, 22 national,
and 38 international industry indexes.
▪ The indexes consider some 1,673 companies listed on stock exchanges in 22
countries,
▪ With a combined market capitalization that represents approximately 60
percent of the aggregate market value of the stock exchanges of these
countries.
50
 5.3.6 Global Equity Indexes

▪ With a combined market capitalization that represents approximately 60

percent of the aggregate market value of the stock exchanges of these
countries.
▪ All the indexes are market value weighted.
▪ The following relative valuation information is available:
➢(1) price-to-book value (P/BV) ratio,
➢ (2) price-to-cash earnings (earnings plus depreciation) (P/CE) ratio,
➢(3) price-to-earnings (P/E) ratio, and
➢ (4) dividend yield (YLD).
51
 5.3.6 Global Equity Indexes

▪ These ratios help in analyzing different valuation levels among countries

and over time for specific countries.
▪ Notably, the Morgan Stanley group index for Europe, Australia, and the
Far East (EAFE) is the basis:
▪ For futures and options contracts on:
➢ the Chicago Mercantile Exchange and
➢ the Chicago Board Options Exchange

52
 5.3.6 Global Equity Indexes

▪ Dow Jones Wilshire Global Indexes

▪ This global Indexes is composed of more than 2,200 companies
worldwide and organized into 120 industry groups.
▪ The index includes 35 countries representing more than 80 percent of
the combined capitalization of these countries.
▪ In addition to the 35 individual countries shown in Exhibit 5.9, the
countries are grouped into three major regions: Americas, Europe, and
Pacific Region and some sub regions.

53
 5.3.6 Global Equity Indexes

▪ Dow Jones Wilshire Global Indexes

▪ Finally, each country’s index is calculated in its own currency as well as in
U.S. dollars.
▪ The index for the individual countries is reported daily in The Wall Street
Journal and the full presentations is published weekly in Barron’s.

54
 5.3.6 Global Equity Indexes

▪ Comparison of World Stock Indexes

▪ As shown in Exhibit 5.10 below:

▪ The correlations between the three series since December 31, 1991,
indicate that the results with the various world stock indexes are quite
comparable.
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 5.3.6 Global Equity Indexes

▪ Comparison of World Stock Indexes

▪ The major differences:
➢Are a number of stocks in alternative indexes,
➢but more important is the source of the sample.
✓E.g., stocks from the NYSE, NASDAQ, all U.S. stocks,
✓Or stocks from a foreign country such as the United Kingdom or Japan.

56
 5.4 Bond-market Indexes

▪ Investors know little about the growing number of bond-market indexes

currently available why?
▪ Because these indexes are:
➢ relatively new and
➢not widely published.
▪ Still, knowledge regarding these indexes is important Why?
▪ Because of:
➢ The growth of fixed-income money managers and mutual funds and the
consequent need to have a reliable set of benchmarks to use in evaluating
their performance.
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 5.4 Bond-market Indexes

➢Also, because the performance of many fixed-income money managers

has been unable to match that of the aggregate bond market, interest has
been growing in bond-index funds, which requires appropriate indexes to
emulate.
▪ Notably, it is more difficult to create and compute a bond-market index
than a stock-market index for several reasons.
▪ First, the universe of bonds is much broader than that of stocks, ranging
from U.S. Treasury securities to bonds in default.
▪ Second, the universe of bonds is changing constantly because of new
issues, bond maturities, calls, and bond sinking funds.

58
 5.4 Bond-market Indexes

▪ Third, the volatility of prices for individual bonds and bond portfolios
changes because bond price volatility is affected by duration, which is
likewise changing constantly because of changes in maturity, coupon, and
market yield.
▪ Finally, significant problems can arise in correctly pricing the individual
bond issues in an index compared to the current and continuous
transactions prices available for most stocks used in stock indexes.

59
 5.4 Bond-market Indexes

▪ Subsequent discussion is divided into the following three subsections:

➢(1) U.S. investment-grade bond indexes, including Treasuries;
➢(2) U.S. high-yield bond indexes; and
➢ (3) global government bond indexes.
▪ All of these indexes indicate total rates of return for the portfolio of
bonds and are market value weighted.

60
 5.4 Bond-market Indexes

▪ (1) U.S. investment-grade bond indexes, including Treasuries;

▪ Four investment firms have created and maintain indexes for:
➢ Treasury bonds and
➢ Other bonds considered investment grade, that is, the bonds are rated
BBB (or Baa) or higher.
▪ The relationship among the returns for these investment-grade bonds is
strong regardless of the segment of the market. (correlations average
about 0.95)

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 5.4 Bond-market Indexes

▪ (2) U.S. high-yield bond indexes

▪ One of the fastest-growing segments of the U.S. bond market during the
past 30 years.
▪ It includes bonds that are not investment grade — that is, they are rated
Ba, B, Caa , Ca, and C.
▪ Because of this growth, four investment firms created indexes related to
this market.

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 5.4 Bond-market Indexes

▪ (3) global government bond indexes

▪ The global bond market has experienced significant growth in size and
importance during the past 15 years.
▪ Notably, this global bond segment is dominated by government
(sovereign) bonds because most non-U.S. countries do not have a viable
corporate bond market.
▪ Several major investment firms have created indexes that reflect the
performance for the global bond market.
▪ Although the various indexes have similar computational characteristics,
the total sample sizes and the numbers of countries included differ.
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 5.5Composite Stock-bond Indexes

▪ Beyond separate stock indexes and bond indexes for individual

countries, a natural step is the development of a composite index that
measures the performance of all securities in a given country.
▪ With a composite index investors can examine the benefits of
diversifying with:
▪ A combination of asset classes such as stocks and bonds
▪ In addition to diversifying within the asset classes of stocks or bonds.

64
 5.5Composite Stock-bond Indexes

▪ There are two such indexes available:

▪ First, a market-value-weighted index called Merrill Lynch-Wilshire
Capital Markets Index (ML-WCMI)
▪ It measures the total return performance of the combined U.S. taxable
fixed income and equity markets.
▪ It is basically a combination of the Merrill Lynch fixed-income indexes and
the Dow Jones Total Stock Market common-stock index.
▪ As such, it tracks more than 10,000 U.S. stocks and bonds and, as of early
2011,
▪ A relative weights are about 40 percent bonds and 60 percent stocks.
65
 5.5Composite Stock-bond Indexes

▪ The second is the Brinson Partner Global Security Market Index

(GSMI)
▪ It contains U.S. stocks and bonds as well as non-U.S. equities and
nondollar bonds.
▪ The specific breakdown as of April, 2011 was:

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 5.5Composite Stock-bond Indexes

▪ The index is balanced to the policy weights monthly.

▪ Because the GSMI contains both U.S. and international stocks and bonds,
it is clearly the most diversified benchmark available with a weighting
scheme that approaches market values.
▪ As such, it is closest to the theoretically specified “market portfolio of
risky assets” referred to in the CAPM literature.

67
 5.6 Comparison Of Indexes Over Time

▪ looking at price movements in the different indexes for monthly intervals.

▪ 5.6.1 Correlations between Monthly Equity Price Changes
▪ The correlation differences are mainly attributable to the different sample of
firms listed on the various stock exchanges.
▪ All of the indexes—are market-value-weighted indexes that include a large
number of stocks.
▪ Therefore, the computational procedure is generally similar and the sample
sizes are large or all-encompassing.
▪ Thus, the major difference between the indexes is that the samples of stocks
are from different segments of the U.S. stock market or from different
countries.
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 5.6 Comparison Of Indexes Over Time

▪ Thus, the major difference between the indexes is that the samples of
stocks are from different segments of the U.S. stock market or from
different countries.
▪ There is a high positive correlation (0.98–0.99) between the Dow Jones
Total Stock Market Index and the several comprehensive U.S. equity
indexes: the S&P 500, and the Russell 3000 and Russell 1000 large cap
index.
▪ In contrast, there are lower correlations with various style indexes such
as the Russell 2000 Small-Cap index (0.828).
69
 5.6 Comparison Of Indexes Over Time

▪ The correlations between the Dow Jones Total Stock Market Index and
the several non-U.S. indexes are clearly lower ranging from 0.462 (Pacific
Basin) to 0.726 (Europe).
▪ All of these support the case for global investing.
▪ These results confirm the benefits of global diversification because such
low correlations would definitely reduce the variance of a pure U.S. stock
portfolio.

70
 5.6 Comparison Of Indexes Over Time

▪ 5.6.2 Correlations between Monthly Bond Index Returns

▪ The correlations with the monthly Barclay Capital (BC) Govt. bond return
index consider a variety of bond indexes.
▪ The correlations with the U.S. investment-grade bond indexes ranged
from about 0.94 to 0.98,
▪ confirming that although the level of interest rates differ due to the risk
premium, the overriding determinate of rates of return for investment-
grade bonds over time are Treasury interest rates.
▪ In contrast, the correlations with high-yield bonds indicate a significantly
weaker relation ship (correlations about 0.51) caused by strong equity
characteristics of high-yield bonds.
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 5.6 Comparison Of Indexes Over Time

▪ Finally, the low and diverse relationships among U.S. investment-grade

bonds and
▪ all world government bonds (0.57) and world government bonds without
the United States (about 0.37) reflect:
▪ Different interest rate movements and exchange rate effects.
▪ Again, these results support the benefits of global diversification of bond
portfolios alone or with stock portfolios

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 SUMMARY

• Given the several uses of security-market indexes, it is important to

know how they are constructed and the differences between them.
• To determine how the market is doing, you need to be aware of
what market you are dealing with so you can select the appropriate
index.
• Indexes are also used as benchmarks to evaluate portfolio
performance.

73
 SUMMARY

• In this case, you must be sure the index (benchmark) is consistent with
your investing universe.
• If you are investing worldwide, you should not judge your performance
relative to the DJIA, which is limited to 30 U.S. blue-chip stocks.
• For a bond portfolio, the index should like wise match your investment
philosophy.
• Finally, if your portfolio contains both stocks and bonds, you must evaluate
your performance against an appropriate combination of indexes.

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 SUMMARY

• Investors need to examine numerous market indexes to evaluate the

performance of their investments.
• The selection of the appropriate indexes for information or evaluation
will depend on how knowledgeable you are about the various indexes.
• The background from this chapter should help you:
➢understand what to look for and
➢ how to make the right decision in this area.

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Reference : Fr an k K . R e i l ly &Ke i t h C . B row n, I nve st ment Ana ly sis &
Por t folio M a nage me nt , Te nt h E dit io n , © 2 0 1 2, 2 0 0 9 So u th - we s te r n,
Ce n gage L e ar n ing AL L R I G H T S R E SE RVED

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THANK YOU

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